You can’t deduct K-1 losses against basis that isn’t “at-risk”

April 12th, 2013 by Joe Kristan

Like a polyester suit, the “at-risk rules” of the 1970s are both ugly and indestructible.  They were enacted to combat tax shelters based on buying cattle or equipment with loans that were “non-recourse” — if the partnership didn’t pay the loan, the lender could only get back the cows or the tractors, and the partners were scot-free.  Because the debt increased partnership basis, this enabled partners to buy deductions by buying interests in leveraged partnerships  — often with loans nobody ever expected to collect – holding depreciable assets.

The at-risk rules defer losses attributable to basis that is not “at-risk.”  On a K-1, the partner’s share of debt is helpfully broken into three categories:

Click to enlarge

There is space for the “recourse” and “nonrecourse” liabilities of the partnership. The “non-recourse” liabilities are normally not “at-risk,” so if you need the basis on that line to deduct your K-1 losses, you may be out of luck.

You’ll also see a space for “qualified non-recourse financing.” This is a tribute to the real-estate lobby of the 1970s, who won special treatment for non-recourse debt incurred in real estate activities. Nonrecourse debt that meets certain conditions – mostly debt from commercial lenders or government agencies – is “qualified nonrecourse financing” and is deemed to be “at-risk” under the tax law, even if it isn’t in real life.

If your losses exceed your other basis, you compute your at-risk disallowance on Form 6198.

Even if you have basis and it’s at-risk, you still might not get a deduction.  If your loss is “passive,” then it may deferred until you have “passive” income or until you dispose of the passive asset.

Just another swell 2013 filing-season tip!  More through Monday.